Balanced Budget Talking Points #4: The $500-Per-Child Tax Credit Means One Month's Food and Mortgage for a Typical American Family

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BALANCED BUDGET TALKING POINTS #4: THE $500-PER-CHILD TAX CREDIT MEANS ONE MONTH9S FOOD AND MORTGAGE FOR A TYPICAL AMERICAN FAMILY

Scott A. Hodge Grover M. Hermann Fellow in Federal Budgetary Affairs

"Ifyou take the $500 a year tax credit, and Ifigure, you know, $5for a bottle of wine, that is 100 bottles of winefor afamily ... .. - Congressman Jim McDermott (D-WA)

Contrary to what elitists in Washington would have the public believe, for most hard- working American families raising children a $500 tax cut for each child is not an insignificant amount of money. This is especially true as many families no doubt are wondering how they will be able to afford the $432 some surveys report each household expects to spend this holiday season.2Yet the families.of 51 million children, or over 28 million families in all, will be denied relief from their financial worries by President Bill Clinton's expected veto of Congress's seven year balanced budget and tax cut plan, which had as its centerpiece a $500-per-child tax credit. This tax cut would pump over $22 billion per year into family budgets across the country so that working parents can provide for their children in a way no government program can. As congressional Republicans negotiate with the White House on a compromise plan to balance the budget by 2002 and provide tax cuts, they should resist pressure to scale back the $500-per-child tax credit as a price for cutting a deal. Those who argue that Washington cannot "afford" such generous tax cuts while the government is trying to balance the budget are, in effect, arguing for higher spending. The budget will not be balanced any faster if the amount of the per-child credit is reduced below $500 or if the income for which families are eligible is 3 lowered from its current level of $110,000 for joint filers. Any money not put back 9YI # 75195 in the checkbooks of working families with children through tax cuts, is more

1 Tax Provisions in the Contract With America Designed to Strengthen the American Family, Hearings before the Committee on Ways and Means, U.S. House of Representatives, January 17,1995 p. 30. 2Bureau of National Affairs, "Conference Board, Arthur Anderson Polls Put Moderately Upbeat Face on Holiday," November 24, 1995. 3For taxpayers filing jointly with incomes above S I 10,000 the credit phases out at a rate of $25 for each $ 1,000 above the threshold (a range of $20,000), thus fully phasing out at $130,000 in income. For families with two

money in the checkbook for politicians and bureaucrats to spend while the budget is moving. toward balance. Congressional and White House negotiators should keep in mind that for parents with two children, the $ 1,000 tax cut they would receive under this plan could mean the difference between paying the mortgage and not. Indeed, as the table below shows, a $ 1,000 tax cut for the typical family with two children. is enough to pay one month's mortgage and grocery bills, or I I months worth of electric bills, or nearly 20 months worth of clothing for the children. In other words, a $1,000 tax cut is a significant amount of money for most families' household budgets.

What the $500 Per-Child Tax Credit Means For a Family With Two Children How many Annual Months of This Household Item Can Be Cost for a Purchased with Family Budget Item Family of Four Monthly Cost $ 1 1000 6 'Y1M07@-:-----.--T,-, 7M." "'A ,;@.,4,9 2 @ @ @ ', Mortgage Payment (Principal, Interest, and Taxes) 7,972 664 1.5 M`131 Electricity 1,085 90 11.1

children, the two credits this family is eligible for are fully phased out at $150,000 in income. For single filers, the credit begins to phase out at $75,000 in income. There are also sound policy reasons to cut taxes for families with children: Families with children are overtaxed. In 1948, the average American family with children paid only 3 percent of its income to Uncle Sam. Today the same family pays 24.5 percent.

\u239\'95 Giving a family of four a $500-per-child tax credit is equivalent to giving them one month's mortgage payment. The average family now loses $10,060 per year of its income due to the 45-year increase in federal taxes as a share of family income. This tax loss exceeds the annual mortgage payment on the average family home. The $ 1,000 in tax relief the congressional tax-cut plan would give to a family with two children would help this family pay one month's mortgage payment.

\u239\'95 Millions of families stand to benefit. The families of 51 million American children, or 28 million taxpaying families, are eligible for the $500-per-child tax cut.

\u239\'95 Family tax relief helps families in every state. The typical congressional district has some 117,000 children in families eligible for a $500 tax credit. Thus families in the typical district would receive $54 million per year in tax relief

\u239\'95 Congress's $500-per-child tax credit would eliminate the entire income tax burden for 3.5 million taxpayers caring for 8.7 million children. These 3.5 million families will receive over $2.2 billion per year in tax relief. Families with two children earning up to $24,000 per year would see their entire income tax burden eliminated by a $500-per-child tax credit, and families with three children earning up to $26,000 also would have their income tax bill eliminated.

\u239\'95 Most families are middle-class. The $500 child credit plan will direct 89 percent of all benefits to families with adjusted gross incomes below $75,000 per year - middle-income by any standard - and over 96 percent to families with incomes below $100,000.

\u239\'95 Cutting taxes for all families - regardless of income - is fair. Congress's plan will cut the income tax burden of a family of four earning $30,000 per year by 51 percent and the income tax burden of a family earning $40,000 per year by 30 percent. Meanwhile, a family of four earning $75,000 would see their tax burden reduced by 12 percent, and a family earning $100,000 per year would receive a tax cut oflust 7.4 percent. Ch art 2

The following tables represent the best available means of estimating the amount of family tax relief that will go to each state and congressional district -from a $500-per-chfid tax credit. It should be noted that not every eligible family will be able to subtract the full $500 for each child from its tax bill. We have tried to take the following exceptions into account:

The $500 credit is non-refundable. This means that a family cannot get more in tax relief am it pays in income taxes. Example: a family of four earning $20,000 per year owes about S458 in income taxes. Though the $500-per-child tax credit might otherwise get them $ 1,000 in total tax relief because of their two children, the fact that this credit is not refiindable allows them to deduct only what they owe - $458 - from their income tax bill.

The $500 credit is phased out for joint filers with incomes above $110,000 per year and single filers with incomes above $75,000 per year. For taxpayers filing jointly with incomes above $110,000 the credit phases out at a rate of $25 for each $ 1,000 above the threshold (a range of $20,000), thus fully phasing out at $130,000 in income. For families with two children, the two credits this family is eligible for are fully phased out at $150,000 in income. For single filers, the credit begins to phase out at $75,000 in income and is fully phased out at $95,000 in income.

The first two tables, showing the number of households and children by state, were calculated using the 1991 IRS Public Use File. This data is derived from income tax return forms and the nurnber of dependents claimed on those forms.

The tables listing family tax relief by congressional district were calculated using the 1990 Census.

Because the sources for the two tables are different the tax relief calculated for each state will not necessarily equal the sum of tax relief for that state's individual counties. In each case, the source is the most accurate data available for that specific level of analysis. The differences may be caused by the following facts:

I . The IRS data are based on tax returns filed with the federal government. Not every household files a tax return, however. For some groups this is by law; Native Americans are not required to file a tax return. Other individuals do not file because they do not have an income to report. Finally, some people simply do not file for personal reasons. These same groups may be counted by the Census Bureau but will not be accounted for by the IRS. 2. Many people maintain a permanent residence in one county or state but live in another. These people pay taxes in a different county or state than where they live. Again the Census and IRS will account for these people in different locations. 3. Many people file their tax returns late. Thus, the data from the 1991 IRS files may not include certain families that would be included in the Census count. Alternatively, the IRS records may include more families (because of people filing from past years) than the Census Bureau count. The Value of the $500 Per Child Tax Credit By State

DELAWARE DE Single District M. Castle R 141,3451 $79,153,200 $409,158,439

The Heritage Foundation 10 Source: 1990 U.S. Census

VALUE OF $500 PER-CHILD TAX CREDIT BY CONGRESSIONAL DISTRICT

Tax Relief Per District in 1996 Seven Year Total Number of Children (Including (including in Families Eligible Retroactive to Retroactive to State I Congressional District Name of Member Party for $500 Tax Credit October 1995) October 1995)

Tax Relief Per District in 1996 Seven Year Total Number of Children (including (Including in Families Eligible Retroactive to Retroactive to State I Congressional District Name of Member Party for $500 Tax Credit October 1995) October 1995) KY District 3 A Ward D 114,0.65 $63,876,400 $330,189,659 KY District 4 J. Bunning R 130,811 $73,254,160 $378,665,142 KY District 5 H. Rogers R 102,384 $57,335,040 $296,376,084 KY District 6 S. Baesler D 116,466 $65,220,960 $337,139,954

Tax Relief Per District in 1996 Seven Year Total Number of Children (Including (Including in Families Eligible Retroactive to Retroactive to State I Congressional District I Name of Member I Party I for $500 Tax Credit October 1995) October 1995)

Tax Relief Per District in 1996 Seven Year Total Number of Children (Including (including in Families Eligible Retroactive to Retroactive to State I Congressional District I Name of Member I Party 1 for $500 Tax Credit October 1995) October 1995)

SOUTH DAKOTA SD Single District IT. Johnson I D 156,070 $87.399,200 $451,783,633

Tax Relief Per District in 1996 Seven Year Total Number of Children (Including (Including in Families Eligible Retroactive to Retroactive to State I Congressional District Name of Member Party for $500 Tax Credit October 1995) October 1995) UT District 2 E. Waldholtz R 173,704 $97..274,240 $502..829,654 UT District 3 B. Orton D 182.302 $101,977,120 $527,139..765